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4/3/09

India could be heading for a weaker and perhaps short-lived coalition government after the April-May general election, with both major national parties struggling to keep regional allies.

Congress has ruled for most of the last five years through a stable coalition. But it is now losing allies as many regional groups distance themselves from a party that they see as out of touch after decades of dominating India's political landscape.

A group led by the opposition Hindu-nationalist Bharatiya Janata Party (BJP) is also struggling, with little presence in southern states like Tamil Nadu, while several northern parties eyeing Muslim votes united against its radical Hindu elements.

This year, a Third Front of regional parties led by the communists, has added to the dispersal of political forces.

It is all a sight that may reflect well on a democracy of 1.1 billion people from a myriad of castes and languages.

But investors worry it could herald policy limbo just as the economy faces a slowdown, lost jobs and fiscal imbalances.

While reforms to open up the financial sector may be on the backburner amid the global credit crunch, investors are looking for changes in India's rigid labour laws as well as moves to privatise state companies to help boost investments.

"Most pre-poll alliances are falling apart. It looks like many regional parties will try and get their pound of flesh," said Vikas Khemani, co-head for institutional equities at Edelweiss Securities.

"That is getting a lot of people nervous."

The fear is that a loose coalition will mean more squabbling over policy. It could lead, for example, to a small party representing one farming caste from a single Indian state to hold sway over a billion-dollar national economic stimulus package.

The secular, left-of-centre Congress dominated India after independence in 1947, for decades winning an absolute majority of votes. But a gradual erosion of support saw gains for the BJP in the 1990s, and now 2009 may herald the rise of regional parties.

Congress and the BJP won between them just over 50 percent of the vote in the last 2004 election, so a further fall in their support would effectively make regional and caste based parties the dominant political force in India.

Sensing this, former regional allies have bickered with these two parties over seat-sharing arrangements in states, a sign they are biding their time until after election results on May. 16.

ELECTION MATHEMATICS

While elections have been fought over national issues, this time coalition mathematics may be more important than campaigns over economic growth, terrorism or inflation.

If both Congress and BJP do badly, the next prime minister may surface from negotiations after the vote, with horse-trading and backroom deals between the national and regional parties.

"With post-poll alliances, the ball is in the court of middlemen," wrote Yogendra Yadav, a Senior Fellow at Centre for Study of Developing Societies, in the Hindu newspaper.

Leaders like Mayawati, leader of a "party of untouchables" in Uttar Pradesh, believe they may win enough votes to bargain for ministerial posts. She is tipped to be a possible prime minister in a hung parliament.

Analysts say a new coalition without a strong Congress or BJP could last just two years, as happened in 1996 when 13 parties won power and fell two years, and two prime ministers, later.

Only weeks ago, Congress seemed to have a better chance of winning, with its government coalition appearing intact, as well as better-than-expected state election performances last year.

But seat-sharing arrangements for Congress have broken down in Uttar Pradesh, the biggest single source of parliamentary seats, accounting for 80 of a total 543 MPs.

The birth of new regional parties has also threatened the party in swing states like Andhra Pradesh.

"The message is that Indian voters want another option," said analyst Mahesh Rangarajan. "Regional parties are smelling blood. They are closer to power than they have ever been."

Some analysts believe that Rahul Gandhi, the 38-year-old rising star in Congress, knows defeat beckons and plans to revamp the party to win new elections after a short-lived government.

But investors say India can ill afford even two years of limbo, with a fiscal deficit more than 10 percent of GDP.

"The looser the coalition the tougher will be the consensus building on reform," said D.K. Joshi, principal economist at ratings agency Crisil.

The hope for many investors is that analysts have it wrong. Many experts failed to predict a Congress victory in 2004 and party head Sonia Gandhi is skilled at crafting alliances.

"No one really knows what can happen. The elections could throw up a surprise," Joshi said.